News & opinion

24 SEP 2018

Valuing the data elephant

In real estate, where the ‘cash cow’ of the physical asset is still healthy, there is a reluctance to acknowledge the presence of the digital asset – the new intangible kid on the block – and what it could mean in the future.

We spoke to Linda Chandler, Chief Technology Officer and co-founder at LIQUID Real Estate Innovation, on how the industry needs to embrace valuing the digital asset alongside the physical asset and urges business models to pivot from the ‘cash cow’ to the ‘data elephant’.

In almost every meeting I attend these days, whether it be about real estate, energy or smart cities, the ‘elephant’ in the room is data. Or more particularly – discoverability of data; access to data; integrity of data; privacy of data; provenance of data; the value of data.

I was at Microsoft when the leadership made a decision to pivot the business from ‘boxed’ software to the cloud and subscription services. Why change? In the technology business the perpetuity licence was still a cash cow a few years ago and it took a cultural change within the company to acknowledge that the cannibalisation of the current business model was necessary to survival in the future. It wasn’t a popular decision with many, but as cloud revenues are credited with propelling the company’s revenues to exceed $100bn in FY2018, it was a smart move for Microsoft to make at the time.

The ‘elephant’ in the room is data. Or more particularly – discoverability of data; access to data; integrity of data; privacy of data; provenance of data; the value of data.

When there is still good money to be made out of the physical asset in real estate, it is this similar future-proofing stance that indicates why the industry needs to shift it’s thinking.

How it was

In many ways, the methodology of valuing the physical asset through the Red Book still bears remarkable resemblance to when RICS was established 150 years ago.

Traditionally, you would value largely the things you could see and touch – the land, utilities and services, buildings and structures. As these were the only things of value, it follows that they would be the only things you would invest in.

How it is

The physical asset is rigorously analysed by the market, but what about the value of the digital asset? What does the digital asset mean with respect to the built environment and who owns it? There are various initiatives around Building Information Modelling (BIM) and data pertaining to the fabric of the building itself, but also data exists around the productivity of the people that use the building and their health and wellbeing. How does all this data come together and is it valuable?

There is much recognition that something needs to be done – initiatives such as BIM, the Radius Data Exchange in the UK – are all trying to change the culture around data and collaboration in the sector.

However, many organisations are still failing to recognise that in a future world, the intangible asset could potentially be worth a good proportion of the physical asset.

According to Savills, the global real estate market is worth around $217 trillion US dollars – estimated to be 60% of the value of all global assets. The value of global commercial real estate is around $28 trillion is. Even at a modest 10%, on a $28 trillion market, the digital uplift figures are compelling.

How it could be

Observing the impact of digital on other industries that have been reduced to data – as observed by Microsoft distinguished engineer James Whittaker – it is only matter of time before this starts to happen to the commercial real estate sector: In the next 5-10 years, I believe that the digital asset will start to be curated and quantified alongside the physical asset.

This is a total market disruption to the current status quo – some organisations have already recognised the value of data in the industry, but it’s fragmented. There is an opportunity for a more holistic and sustainable approach to leverage data to gain insights into making the experience of the building for both users and tenants rich and rewarding.

The old adage around big data was the Four Vs: volume, variety, velocity and veracity. The fifth V is undoubtedly value. Many are familiar with the WeWork story – a company worth 10 times its competitors. The valuation of the intangibles – brand, experience, data – have contributed to its perceived corporate worth in the market.

In their book Capital Without Capitalism, Jonathan Haskell and Stian Westlake argue strongly towards the rise of intangibles in a modern economy. So, we can value WeWork because there is a market in which to do so and to compare. It is difficult to value data because there is no market and where there is no market you have to find other ways. Or perhaps you create a market? One that that would encourage data exchange and allow the full spectrum of open, commercial, private data to be traded and hence valued.

The message for the industry is by all means continue to milk your cash cows, but be aware that the data elephant is coming…